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As the connected car market glows, LTE is becoming the main connectivity technology not only for the V2X (vehicle-to-vehicle, vehicle-to-person, vehicle-to- roadside unit) communications but also for providing value added services (e.g., infotainment).For example, the 2015 Audi A3 LTE connectivity service includes navigation with Google Earth and Street View, weather and event information. Thus, one may expect that the increasing use of LTE can make the automotive sector a new patent dispute battleground

2.
JANUARY 2016 T h e L i c e n s i n g J o u r n a l 1
LTE Patents Licensing Royalty Issues
with Connected Cars
Alex G. Lee
As the connected car market grows, long term
evolution telecommunications technology (LTE) is
becoming the main connectivity technology not only
for the vehicle-to-vehicle, vehicle-to-person, vehicle-
to-roadside unit (collectively, V2X) communications,
but also for providing value added services (e.g.,
infotainment). For example, the 2015 Audi A3 LTE
connectivity service1 includes navigation with Google
Earth and Street View, weather, and event informa-
tion. Thus, one may expect that the increasing use
of LTE can make the automotive sector a new patent
dispute battleground.2
The main issue with the LTE patent dispute will
be the reasonable royalty of LTE standard essen-
tial patents (SEPs) that can be used for damage
evaluation regarding infringing LTE products. SEPs
encompass intellectual property rights (IPRs) for the
standardized technologies. Usually, all the essential
aspects of standardized technologies are particular-
ized in standard specifications.3 Thus, SEPs can be
defined as patents that include one or more claims
that are infringed by the implementation of cer-
tain standard specifications. Consequently, any LTE
standard–compatible products (e.g., LTE connectiv-
ity chipsets) may infringe SEPs.
Alex G. Lee is a principal IP Strategist with
TechIPm LLC, an IP strategy consulting firm
based in Boston, MA. He is an emerging technology
(Electronics, Computer, IT, Telecom, IoT) patent
expert with extensive experience in technology
R&D and management, business development,
strategy consulting, and intellectual property man-
agement in the United States and South Korea.
He has consulted with Fortune 500 companies,
patent monetization firms, law firms, investment
firms, and research institutions regarding the
strategy for patents acquisition, investment, pros-
ecution, development, litigation, monetization,
and commercialization. The author would like
to thank Professor Christopher Gibson at Suffolk
University Law School and Professor Michael
L. Rustad, Ms. Hee-Eun Kim, Mr. Larry M.
Goldstein, and Professor Stephen Y. Chow for their
valuable comments.
Standard Setting and Its
Affect on Patent Royalty Rates
Standards often are developed and set-up through
the standardization process by the standard setting
organizations (SSOs).4 If the adopted standards are
covered by some patents owned by the members
that proposed the adopted standards, the mem-
bers become the patentees of SEPs. The patentee
of SEPs may have market power in the relevant
technology market because the industry may be
locked in to using the standard, and the value of
SEPs becomes significantly enhanced. Thus, the
patentee can demand and obtain unreasonably high
royalty payments and artificially increase the value
of the patent due to the very high cost of switching
to alternative technology, which the implementer
would have to pay.5 Thus, the patent hold up occurs
when a patentee of SEPs demands unreasonably
higher license fees after the standard is widely
adopted than could have been obtained before the
standard was implemented.
To avoid the patent holdup problem, a majority
of the SSOs require that the members participating
in the standardization process agree ex ante to license
their SEPs under fair, reasonable, and nondiscrimi-
natory (FRAND)6 terms ex post to any implementers
of the standard. The members’ agreements to license
their SEPs under FRAND terms usually are called
FRAND commitments. In general, FRAND commit-
ments are interpreted as enforceable contractual
obligations between a member and an SSO.7 An
implementer of the standard is a third-party benefi-
ciary of FRAND commitments and therefore entitled
to a license of SEPs.8
Two important questions about the FRAND com-
mitments are FRAND royalty base and rate. One
may use a royalty base equal to the entire market
value of an infringing product if “the patented
feature is the basis for consumer demand” for the
entire product.9 If the patented feature is not the
basis for consumer demand for the entire product,
the royalty base only should reflect the contribu-
tion of the patented feature to consumer demand.10
Thus, if a product consists of many components, the

3.
2 T h e L i c e n s i n g J o u r n a l JANUARY 2016
royalty base can be the market value of the relevant
component to consumer demand created by the
patented feature.11
Caselaw Regarding FRAND
Licensing Rates
In LaserDynamics, Inc. v. Quanta Computer, Inc.,12
the court ruled that the royalty base can be the small-
est saleable component that embodies the patented
feature. By this reasoning, the FRAND royalty base
may be the smallest saleable component that embod-
ies the relevant SEPs. After the FRAND royalty base
was determined, a royalty rate for a specific SEP
can be calculated by taking account of the economic
contribution of the specific SEP to the smallest sale-
able component that is used in determination of the
FRAND royalty base.
In Microsoft Co., v. Motorola, Inc.,13 the court
affirmed the lower court ruling in determining the
FRAND royalty. The district court provided basic
guidelines for assessing FRAND royalty. The district
court devised the guidelines based on the Georgia-
Pacific analysis of the reasonable royalty14 modified to
take into account the SSOs’ primary goals for requir-
ing FRAND commitments. The court provided five
primary goals for adopting FRAND commitments:
1. Promotion of widespread adoption of SSOs’
standards;
2. Avoidance of patent hold-up;
3. Avoidance of royalty stacking;
4. Creation of valuable standards; and
5. Exclusion of hold-up value in the reasonable
royalty.
The court, then, modified the Georgia-Pacific factors
to account for the five primary goals for requiring
FRAND commitments. The key modification to the
Georgia-Pacific factors leads to the reasoning that a
royalty in a patent pool for the specific SEPs at issue
or comparable licensing transactions as a candi-
date for the royalty established through negotiation
under FRAND commitments. Thus, the royalty rate
in the recently formed LTE patent pool may provide
expected FRAND licensing revenue.
Another court’s guidelines for assessing FRAND
royalty for SEPs can be found in In re INNOVATIO IP
VENTURES, LLC.15 The court calculated FRAND roy-
alty (cap) of WiFi SEPs using the average profit mar-
gin of the WiFi chips that cover all the implemented
features of the WiFi standard in the infringing prod-
ucts. Then, the court calculated FRAND royalty by
multiplying the average profit margin to the contribu-
tion of patentee’s SEPs to the profit and pro rata share
of patentee’s SEPs to the total number of WiFi SEPs
providing similar contribution to the profit. Thus, LTE
FRAND royalty can be evaluated as (average profit
margin to the contribution of patentee’s SEPs) ϫ
(net profit of relating products) ϫ (pro rata share of
patentee’s SEPs to the total number of LTE SEPs pro-
viding similar contribution to the profit).16
In response to the courts’ determination of FRAND
Royalty, major SEPs owners such as Qualcomm,
Nokia, and Ericsson expressed their serious concerns
about the courts’ rulings to diminish the value of
SEPs. Qualcomm insisted that there is nothing wrong
with the licensing practice of using the price of the
entire end product as the appropriate royalty base,
because licensing at the end user device level has
been an industry custom in the telecommunications
sector.17 By the telecommunications industry custom,
Qualcomm explained that patentees of SEPs usually
did not enforce licensing obligations to component
manufactures. Therefore, FRAND royalty base can-
not be the smallest saleable component that embod-
ies the relevant SEPs.
The Private Sector Speaks Up
Additionally, Qualcomm reasoned that the contri-
bution of the patented feature to consumer demand
should not be limited to components of devices
because extended consumers’ benefits are coming
from the services provided by the network connecting
devices.18 Therefore, the smallest saleable component
that embodies the relevant SEPs actually is the device
itself in the telecommunications sector. Furthermore,
developing standard technology in mobile telecom-
munications is a high-risk business. Thus, without
strong patent protection and return for Research
& Development, there will be no encouragement
for further investment in telecommunications stan-
dards. Consequently, artificially diminished royalties
on mobile telecommunications standard–compatible
products will impede innovation, and thus, harm to
the industry and consumers ultimately.19
On the other hand, Cisco, HP, Microsoft, and sev-
eral other IT companies argued that the use of the
entire market value as a royalty base should not be
used unless all of the profit of the infringing product
is attributed to the features of SEPs.20 Thus, the value
of SEPs should be determined by apportion to the
contribution actually made by the patented features
to the accused product. They also insisted that paten-
tees bear the burden of proof for the value of SEPs.

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JANUARY 2016 T h e L i c e n s i n g J o u r n a l 3
A method to resolve disagreement about FRAND
royalty base may be a hybrid approach to royalty
base that was suggested by the 3G licensing plat-
form.21 The 3G licensing platform, which is the
licensing organization for 3G mobile SEPs, adopted
reference market value of the entire product as a
royalty base, if the product consists of several func-
tional blocks. For example, if the product performs
3G mobile communication and other functions that
give values to the users of the product, the royalty
base only takes into account the value proportional
to the 3G mobile communication function embed-
ded in the entire product. Thus, if a mobile phone of
price T includes a component of price A for mobile
communication function and other components of
price B for other independent functions and multiple
components of price C for common functions sup-
porting both mobile communication function and
other independent functions, FRAND royalty base
for mobile communication is A in the smallest sale-
able component approach and T in the entire market
approach. In the hybrid approach to FRAND royalty,
however, FRAND royalty base for mobile communica-
tion is A ϩ C ϫ [A/(A ϩ B)] taking into account the net
contribution of the multiple components for common
functions to mobile communication. Consequently,
FRAND royalty base is a compromise value between
the two extremes such that it is the entire product
value including only the smallest saleable function
contributed by the patented feature of a SEP.
1. https://www.youtube.com/watch?v=Bx9LYdKw5sQ.
2. For potential patent litigation risk regarding LTE, please see my article,
Lee, “Increasing Monetization Activities Exploiting LTE Patents,”
at http://techipm-innovationfrontline.blogspot.com/2015/04/increasing-
monetization-activities.html.
3. To facilitate interoperability among the industry players, participants in
the development of standards establish specifications for the essential
components of the standardized technology. The standard specifications,
however, do not define all the technical aspects for commercial products
implementation.
4. In this article, SSO will be used interchangeably with the traditional
term SDO (Standard Developing Organization). During the standardiza-
tion process, participating members propose their preferred standard
applications to the technical committees of SSOs. Board members of
the technical committees then review the proposed standard applica-
tions and submit the adopted applications to the technical committees
to decide whether to accept the adopted applications through a voting
among the participating members.
5. See, e.g., Mark A Lemley and Carl Shapiro, “Patent Holdup and Royalty
Stacking,” 85 Tex. L. Rev, 1991, 2007 (2007).
6. In this article, FRAND will be used interchangeably with RAND (reason-
able, and nondiscriminatory). In FRAND, fair means underlying licens-
ing terms are not un-fair. Reasonable means that the licensing royalty
rates should not be excessively higher than the value of benefits that can
be acquired by the license. Non-discriminatory means licensors treat all
licensees in a similar manner in licensing agreements.
7. Mark A. Lemley, “Intellectual Property Rights and Standard-Setting
Organizations, 90 Cal. L. Rev. 1889, 1909-1918 (2002).
8. Here, the beneficiary includes both members and nonmembers of the
SSO. See, e.g., id. at 1915.
9. Marine Polymer Techs., Inc. v. HemCon, Inc., 672 F.3d 1350, 1360 (Fed.
Cir. 2012) (en banc).
10. Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1318-1319 (Fed. Cir.
2011). (When a standard is incorporated into only one component of
a multi-component product, royalties based on the value of the entire
product tend to compensate SEP holders for numerous technologies and
features beyond those covered by their patents, thereby overcompensat-
ing them and leading to royalty stacking (the overall cumulative royalty
costs for a given standard in excess of the total product cost)).
11. This situation is especially prevalent in the ICT industry.
12. LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 68 (Fed. Cir.
2012).
13. Microsoft Co., v. Motorola, Inc., No. 2:10-cv-01823-JLR (W.D. WA 2013),
Dkt. No. 681 at 25-41.
14. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120
(S.D.N.Y. 1970). (Fifteen factors for determining a reasonable royalty
are as follows. (1) Royalties patentee receives for licensing the patent
in suit; (2) Rates licensee pays for use of other comparable to the pat-
ent in suit; (3) Nature and scope of license in terms of exclusivity and
territory/customer restrictions; (4) Licensor’s established policy and
marketing program to maintain patent monopoly by not licensing oth-
ers to use the invention; (5) Commercial relationship between licensor
and licensee, such as whether they are competitors or inventor and
promoter; (6) Effect of selling the patented specialty in promoting
sales of other products of the licensee; the existing value of the inven-
tion to the licensor as a generator of sales of his non-patented items;
and the extent of such derivative or convoyed sales; (7) Duration
of patent and term of license; (8) Established profitability of the
products made under the patent, its commercial success and its cur-
rent popularity; (9) Utility and advantages of patent property over
old modes and devices; (10) The nature of the patented invention,
the character of the commercial embodiment of it as owned and
produced by the licensor, and the benefit of those who have used
the invention; (11) The extent to which the infringer has made use
of the invention and the value of such use; (12) The portion of profit
or selling price customarily allowed for the use of the invention;
(13) The portion of realizable profit attributable to the invention
as distinguished from non-patented elements, significant features/
improvements added by the infringer, the manufacturing process or
business risks; (14) Opinion testimony of qualified experts; and (15)
Outcome from hypothetical arm’s length negotiation at the time of
infringement began).
15. In re Innovatio IP Ventures, LLC, No. 1:11-cv-09308 (N.D. Ill. 2013), Dkt.
No. 975.
16. For example evaluation of LTE royalty for a specific SEPs owner, please
see my article, Lee, “How much will Apple need to pay to Ericsson for a
reasonable licensing royalty of LTE patents?,” available at http://techipm-
innovationfrontline.blogspot.com/2015/03/how-much-will-apple-need-to-
pay-to.html.
17. Comments of Qualcomm, FTC Standards Workshop, Project No. P11-
1204, June 13, 2011 at http:// ftc.gov/os/comments/motorolagoogle/
563708-00022-85574.pdf.
18. According to, “Smartphones Are Eating the World,” MIT Technology
Review, March 15, 2013 available at http://www.technologyreview.com/
photoessay/511791/smartphones-are-eating-the-world/, mobile operators’
service market was $1.2 trillion and mobile phone (including smart-
phone) market was $269 billion globally in 2012. In fact, mobile network
operators commonly subsidize mobile phone prices, and thus, consum-
ers actually do not pay the full cost of the phones. Hence, even to base
licensing royalties on the cost to the consumers of the phone is incorrect,
because the phone prices are maintained at an artificially low level by
the network operators.
19. Qualcomm also expressed its concern about reverse hold up such that an
infringer refuses to negotiate in good faith for a FRAND license.
20. Cisco et al.’s amicus briefs with the Federal Circuit: Apple, Inc. v. Motorola,
Inc., No. 12-8540 (Fed. Cir. 2013), Dkt. No. 93.
21. Larry Goldstein and Brian Kearsey, Technology Patent Licensing 154
(Aspatore Books 2004).